NSE Update: CEO musical chairs

NSE continues the gentle journey south. There is nothing to suggest any upward movement until Co-op is listed and its volumes settle down. And of course, the usual upswing prior to full year results in March.

Centum saw PAT down 17% for its half year to September vs.. prior year, not too bad given NSE was down. If CEO was still the same, it might have been worth buying at around ksh12, but now its worth waiting to see where it goes. Notice the very negative cash position. It bought Longhorn, but also made some disposals. Still, I now understand why the dividend was postponed to January. James Mworia who takes over in two weeks time clearly has his work cut out especially given Mwangi left due to strategic disagreements and we are stuck into sub-4000 levels for 2009 at least.Its a buy for me if below ksh10, though there are probably better prospects in the medium term.
KRA came up tramps to make Total look good ahead of its expected purchase of Caltex .
Chris Mwebesa was appointed CFC FS CEO (I wondered why the share has been tanking-apart from the interesting 9 month results which I haven't seen). Bamburi's CEO has also left . Looks like its that time of the yr.
Macro-view: Water rates go up in the new year, maize (our staple food) prices seems to have broken the gate and are on an upward stampede and oil prices remain sticky. So looks like the only way inflation will go below 20% in the first half of 2009 is if its revised (I sense it already has) and some items are removed from the basket. We are walking into economic problems with our eyes wide open. 4 key words for 2009. Food policy. Policy dynamism.

Food Policy: There is a great opportunity to start on a new blank canvas. Just copy and paste the polciy on milk.
Policy dynamism: We nrks are often accused of westernism, but if gova could just react a bit quicker for example on the budget deficit (rather than stealth rise in interest rates) or inflation (was already high last yr), we won't be in this tight situation.

Auditors get to do a proper job

Before monetarist economists tookover the world in the early 80s, auditors and indeed accountants were generally just that. Peeps who did audit and accounts. The new economic era saw them downgrade these vital functions and effectively become consultants. They sort of figured there was no growth in just doing their core jobs. So what you then got if you employed an auditor to review your accounts and give you the greenlight to publish your accounts was a

- firm sends its trainees to look at the accounts and ask the questions. Most although they have some accounting knowledge would be very irritating. No knowledge of your business, of your accounts, processes etc. So you would get basic questions like why did your income grow from last year? Why do you recognise such revenue? These would be the same questions every year because they would be new pack of trainees!

-you'd then get a senior manager who'd on the basis of the information gathered pass your accounts but propose a series of improvements or audit points that he/she thinks you should make and further that the firm can recommend ways of doing this very cheaply.

-But it'll cost you for the additional time. This is the consultant piece which most (and especially the big 4) make their revenue from.

However, with a recession and one driven by credit drought, auditors and accountants will need to be careful that they don't sign-off accounts only for the said company to collapse the day after as has already happened severally. But qualifying accounts comes with a rider, the firm could lose that auditing contract. Still at least, they will have to start earning their money....

Year on year fx movements: $ and £

I was puzzling over the present divergence between a weakening sterling and strengthening dollar vis a vis the Kenya Shilling. Basic economic theory suggest that exchange rates between two countries reflect movements in two accounts. Current and capital account. The current account reflects the balance of payments i.e export and imports while the capital account reflects flow of capital. If you imagine that Kenya only imports but doesn't export anything to the US we'd then have a demand for dollars vs kenya shillings and vice versa where capital inflows were only coming into Kenya. Capital flows are assumed to only be driven by changes in interest rates.

Stepping back from boring theory, the big practical drivers today in these exchange rates are tourism, remittances and trade (exports and imports) in that order. In fact for tourism and remittances, US and UK rank 1 and 2 respectively in terms of the fx earned or sent into Kenya. A basic look at the financial news today will tell you that both nations are suffering equally from similar issues. Similarly trade patterns with the two won't have changed so fundamentally in a period of 5 months. So what is driving this divergence?

If the other factors are moving tghe same way, this leaves one player I haven't mentioned. The key driver is in my opinion, the fx market-makers and dealers who trade (sorry speculate on) on fx movements.

Further reading on similarly puzzling fx rate movements between Canada and US.

Is Kenya ready for e-commerce?

Assuming the fibre-optic projects are delivered in time next year (Seacom which is due to be delivered first will land in June'09) Kenya's economy may well see the same revolution as has occurred due to mobile technology (why are guys so ready to put down Safcom which has driven this?).

1. Is our business community ready? Are they utilising IT to modernise the way they do their business? Where is the increased Kenyan-based business content? Why haven't the number of listed firms with a commercial website increased since 2006?
2. Is govt ready? I keep hearing about computerisation project, but why is it still difficult to locate land maps and the like? Will Kibz be able to work the videolink in his office? How about data protection especially as it pertains to publicly-held records?
3. And mwananchi? I know sales of computers, laptops and associated paraphernalia going up massively, but are guys learning e-commerce as a subject? Or html and related languages? Are entrepreneurs queuing up to push aside none ecommerce business models?

Don't believe in God? So what do you believe in?

Many don't believe in God because of misconceptions about what believing in God means. It doesn't mean that;

• You have to be perfect. Quite the contrary.
• You are weak. No. I don't think anybody would say Obama is weak.
• You are a know-it-all. If you are one, I don't think you'd believe in God.
• You have to be religious. Wrong. Believing in God is first and foremost a personal choice i.e. doesn't involve any rules. Being part of a religion can be one way of sharing that personal believe with others and does involve rules.
• You have to give up on those things you love like getting drunk. Nope, its a personal choice based on your believe.
• Its must to believe in God always. God doesn't need you to believe in him.

My believe is simply my way of thanking him for all the many things (good and bad) that he has seen me through.

So if you don't believe in God, what do you believe in?

NSE Update: uncertain search for the floor

The NSE has the feel of someone trying to touch the floor of a 4m deep swimming pool. While shares are still showing strong fundamnetals for 2008, longer-term investors are now turning their focusing to 2009 and beyond. And it doesn't too pretty if one looks at the economy:

• The weight of the budget deficit is now starting to tell and I expect rates to go up slowly if only because CBK is being cautious with t-bill issuance.


• Higher rates mean higher repayments mean higher loan default rate.


• Inflation is not going to come down below 20% before Q1 and only if concerted eforts are made to tackle it. Means reduced investor wallet.


• Diaspora


• Oil companies are showing usual sticky pattern in reducing fuel prices which keeps manufacturers and others expensing higher

And ofcourse western markets haven't hit bottom yet. They'll do this when we get quicker action on assets. 2ndly, GM and other US motor companies are now on the cliff edge. Honda is feeling the effects.

Bottomline: I still expect the NSE to touch October bottoms before we close 2008.

PS: From last week, Safcom announced worse than expected results for H1 with previously unexpected hits from loan (gave an fx gain but it could be an fx loss another day). Total finally got some bucks from KRA which helped double H1 profits while Marshalls' went the other way.

NSE: Former CEO's real view of the market

NSE is absolutely not de-coupled. Quite the opposite infact. I've charted the table on monthly foreign purchases and sales in Mwebesa's presentation to illustrate this for the year to September. For full presentation, go here and click on the Business Media Development Institute luncheon presentation (its in power point).

Explains alot.

Why doesn't the NSE publish this data even on its monthly bulletin?

The financial crisis: who is next?

IBs, banks, insurers... next has to be

Hedge funds: They hold around a third of credit protection in form of credit default swaps yani they were seller of insurance against credit default by variuos bond providers. And next yr with recession proper, defaults will be high. Luckily for them, most will be able to fold in the privacy of their well polished offices.

Periphery credit financiers: I.e. companies that finance their trade via credit. As unemployment rises, so will default on payments... GM, Ford are already at the front of the queue

Credit card providers: Many had already foreseen the looming crunch, but wierdly were busy weeding out those who do pay on-time a while back. Still limits will be cut.

Airlines: Have survived higher fuel prices, but will they survive downturn in passenger numbers? Tricky, and me thinks a few will succumb.

Supporting suppliers into these industries mostly commission dependant: Already in the last few weeks, I know of:

Estate agents: Closing down. During the peak of the property market some estate agents in our area closed out 2/3 deals per day. Of late they've been lucky to do one per month. Cue redundancies and closures.

Travel agents: Airlines are cost cutting by moving to the net and selling etickets. Travel agents are closing as travel drops off.

Recruitment agencies; Last yr, they were opening at the rate of 1 a month in London. This month they are closing at a similar rate per week.

And who will benefit?

Low-price retailers

Loan sharks such as this one. 442% APR!

Kenya-Ug: 1st chapter over, new bright chapter?

The contract as set out was at best incompetent at worst...By breaking the part where Roy plays the pipe, calls the tune and does the singing; we can see what a more localised solution brings to the table. The deal is still 25 yrs with no real get out clauses (at least to my understanding). Thats not clever.

Clearly two things need to happen in short order insert get out clauses (after two yrs of underperformance as an example) and secondly to have a more robust oversight system that picks up when things are going wrong. This time we've wasted two yrs.

One worry I have about the use local solution providers, it'll be difficult to get them out. They know how to wine and down the powers that be. 2ndly and relatedly, they'll be unable to take the hard-headed decisions that will allow them to make money e.g. rationalising the employee population because they know how to play the game.

Peter Mwangi, formerly Centum, is new NSE CEO

He is an insider so we can expect more of the same...

Pity.

One day, we Kenyans will learn to grab these opportunities to make radical changes.

One positive thing though. That was done quickly...

Ssem seems to have been aware of the green pastures Mwangi was moving to.

Mapping out Africa’s road to success

A nice little article by PM Raila. I think its great that he is paying attention to the role that our infrastructure will play in developing Kenya.

He is probably one of the few politicians in Kenya who understand international PR...

Share Analysing Tools: P/E Ratio

How do you use P/E ratios? If you are looking to buy shares then consideration of the current P/E is relevant for you and should be a useful tool to aid in the decision. If you already hold shares in the counter, then the relevant P/E is the one you bought the shares at.

Firstly P/E stands for price earnings ratio and is calculated as
current share price divided by either
the most recent annual earnings per share
or
forward/estimated earnings per share based on the most recent interim or quarter numbers as per these.

More importantly, a P/E is the premium (fee) you put on a company's earning growth potential. The only other corporate action that should concern you as a shareholder where P/E is concerned would be dilutive moves such as rights issues (which you are unable to participate in) or even the kind of preferred share deals that the likes of Barclays and GS have been doing.

If my average P/E on KCB is 14, it says that I think that all things being equal, I expect KCB's share price to rise to 14 times the price I bought at over my investing horizon. Thinking about that for a minute. It implies that KCB has to in effect double its earnings for 7 years consecutively.

2ndly, P/E also tells you how much goodwill/hype the share has generated from fellow investors in the market. This is an intangible reputational element in the shareprice that can change overnight. And that is why some rank P/E low among their share analysis tools.

Chris Mwebesa, NSE CEO resigns

Interestingly, he had his contract renewed earlier this yr.

I have a couple of ideas about who should replace. One is a very competent NRK who was denied the CMA job for political mathematic reasons.

Its not a difficult job. It’s a plain-vanilla trading book for shares and bonds with not that many deals per day. One can easily monitor positions on a daily basis and be able to give feedback on any funnies the day after. There are not that many brokers, so again doing due diligence on their operations is not back-breaking.

There'd be a lot of very quick wins in terms of changing the bourse workings to bring back investors and especially the all important retail sector.

It'd be an easy job for one to look good in.

You'd have to be very very incompetent to oversee the collapse of 3 brokers in a benign environment.

I am not saying Mwebesa was incompotent but...

Co-op IPO: 70% take up

On the one hand, all subscribers will get full allocation.

On the other hand, price will be down all the way.

Poor marketing and IPO process (I had to abandon my application because the easiest I could buy some was to open a nominee account-which as you know work like a dream for brokers), adversely affected the outcome. And all the drama sorrounding Safcom and brokers didn't help.

Malawi Telcom is a contrast...

UK/US Housing Market & Impact on Kenya's Real Estate

Economic growth in most if not all western economies is fuelled by consumer spending. Consumer spending is in turn fuelled by cash (or more specifically, credit). That is stating the obvious. What doesn't seem obvious to many is that most secured personal and even business loans tend to be secured against properties.

Since the credit crunch started lenders have pulled back credit lines. This means that among other things, first time-buyers can't find affordable mortgages at current house price. Neither can buy-to-let buyers. These two sectors have fuelled growth in house prices over the last decade. This means that sellers have to cut house prices. They in turn have lower deposits for their next homes, cue more price cuts until we get to negative equity. At negative equity,every mortgage borrower has to find additional capital to get a mortgage. Then? Both first-time buyers and those moving homes have to save more. Which means less spending.

This also has implications for Kenya Estate for Diaspora funds that find their way home into real estate. Real estate in Kenya has since 2002 been funded by 3 sources;

1. Diaspora or NRKs (non-resident Kenyans)
2. cheaper and accessible loans
3. and savings in that order. And possiblly NGOs and foreign real estate funds (funded via savings and real estate equity)...

Most diaspora funds used in the real estate in Kenya have been funded from borrowings on housing equity held in their UK/US homes. With most of that equity disappearing (most houses bought since 2005 might be in negative territory by mid 2009), NRKs may find themselves having to not only look for additional funds if they want to invest in Kenya, but also diverting normal savings to cover this negative equity. 2ndly, affordability for resident Kenyans will become an issue.

The only type of real estate that will continue appreciating will be plots...

Kenya @ Crossroads: either a Botswana or a Somalia

I think Standard's Barrack summarises our choice on Waki & Kriegler very well.

Since the murder of Pinto, impunity has a by-word for our rulers' actions. And reaction has been getting stronger until 2007. If we can't resolve our issues legally, 2012 won't bear thinking about. Already one senses rising tensions again as these warlords hide behind their tribes.

IPOs: The matatu syndrome

The unspoken matatu rule that used to operate before the "Michuki rules" was that there was always room for one more. If a matatu had 4 seats per row, these were transformed into 6 or 7 passengers not counting children depending on how busy things were.

In the last few IPOs, this matatu syndrome seems to have become the rule of thumb that D&B (how come it goes all the lead broker roles?) applies to IPOs. So where:

• Safarcom would have been a better IPO listed as 2.5bn shares at Ksh20 each; it was listed as a flooding 10bn shares each worth a very cheap-looking Ksh5.
• Co-op could have been listed in a similar manner to Equity at say Ksh30 with fewer shares; it now has 3.2bn shares each worth ksh9.50.

Mathematically it may not make any difference, but there are several problems with this low-rent and myiopic approach:

1. Potential shareholders look for two things price appreciation and dividend. Most can forget about a Safaricom dividend.
2. Capital raising measures: One of the reasons that companies list is so that should they need to, they can raise capital via the stock market. Can you imagine Safaricom doing a rights issue or Co-op? Both would most likely flop unless offered at a Ksh1 each.
3. Administrative cost: Flooding the market shares means you also have to flood it with investors cue admin costs.

Hopefully going forward, IPOs will be done more flexibly and sensitively.

"Base rates are now so low that our margins are desperately small"

The above quote has been nagging me because in the context of normal commerce it doesn't make sense. Its in the interest of banks that the credit market (mortgages, credit cards, personal and business loans) doesn't collapse leaving them with masses of non performing loans. And yet, they seem to have accepted this but not reducing their lending rates. it doesn't make sense...

Unless you compare with stock-led oil industry i.e. crude oil prices and petrol prices. Everytime crude oil prices go up, petrol prices go up almost straight away. But there is always stickiness when crude oil prices go down. The reason is two-fold. Stocks and secondly, pure profiteering.

In the banking sector, the Central Bank interest rate sets the signal for which way interest rates should go. In a perfect market, a 25% fall in Central Bank interest rates would instantly be reflected in borrowing and saving interest rates. If not the full 25%, then at least 15% with the 10% covering administrative costs...

Following the largest interest rate cut by BoE of 150bps (1.5%), most banks are saying that they can't reduce borrowing rates. Last Thursday's 150bps cut and equivalent fall in LIBOR should have led to a minimum cut of 50bps allowing for pure interest margin and administrative bps. Those that have reduced their rates (basically those needing capital from gova), have also stopped offering BoE rate tracker products to new customers. This despite LIBOR falling by a similar margin.

Banks are unwilling on unable to cut their rates by as much (and some not even at all) because

1. Many want to reduce assets. By not offering lower priced lending products, they keep customers away. Also risk-averseness is now the name of the game and lower prices are now associated with growth in assets and risk.
2. Cost of funding: Despite BoE best attempts, cost of funding remains high in wholesale funding market and inaccessible for some of these banks. HBOS, the largest mortgage lender with around 20% of the UK market is now seen as a basket case to which wholesale lenders will only lend to after its takeover by Lloyds TSB is completed.
3. Broken funding models: In the old days before CDS tookover from sensible banking, most Treasury Divisions in a bank had a rolling hedging strategy that involved profiling of the maturity of its various lending products on offer at any given time (say monthly) and finding funding hedges to match that book through the yield curve. These days, doing such a hedging strategy can't be modelled let alone be used as its flout with difficulties because most banks have erroneously sold off loans whose downside somehow still sits with them.

The situation is not unique to the UK. In the US, banks are similarly pulling back from lending leading to a vicious circle in the housing market that is then negatively infecting the whole economy.

That is why I think that despite the mountainous sums given to banks, the end-game solution to this crisis lies in the housing market.

Monday shorts

So did Kenya reclaim Obama? Or did Obama reclaim Kenya? Its a bit of both. Mind you, afadhali Kenyans. The Irish are claiming him on the basis of his great*5 grandpa. We had a Kenyan party for Obama sponsored by the High Comm and Balala's ministry on Saturday. First mistake was to serve the generously supplied free Tusker Baridi and the like almost two before the meeting kicked off proper. Non one was listening by the time the speeches were being done. How is this for luck? US has Obama, UK has Dizzy (sorry Dizzle). Finally, guys are saying that Obama has been elected at just about the worst tine in US history so he can fail. Well, put it it this way, how many gave him a chance when he first stood or went one to one with Hilary and later with McCain?

Interesting piece in the context of politics. But also stock markets. How many of us stock market investors can genuinely confess to not knowing what is going in the market like 50% of the time. Because you see if we did know what was going on even 85% of the time, we'd all be billionaires like WB who does. By this I don't mean that we don't know our fundamentals but there is as I intimated in my simple equation the other day, a lot variables in the market and saying you know how all those players will react to situations or what their strategies are is like saying you know what everybody is thinking. Unlikely...

A cut in interest rates of 1.5% should be seeing many homeowners and prospective ones smiling. But no. While most banks have passed the cut onto any holders of their variable-rate mortgages, they have also withdrawn any BoE trackers thus closing off prospective house buyers. The rest are dragging their feet saying they can't make the margins even wihn Libor falling! Gova's work is really cut out.

Tiomin discovered tatinium in 1995 in Kwale, got a contract to mine it in 2002. Almost 7 years later it still can't get started. Ignoring the idiotic ways of the ex-president and Kibz, can't they just tell Tiomin its not going to happen because we really don't need the jobs. Don't forget there is a ready market for the product (hence the Chinese interest).

In the UK, they have News of the World a scandal-filled tabloid, but I reckon even it won't be able to pull a story like this (so humorously told despite the sad situations that we Kenyans get ourselves into to get makaratasi)... Wakenya aibu ndogo ndogo.

NSE Update: traders vs long-term investors

After the bull, the bear, a creature made in the ATS laboratories showed up briefly at the NSE from last Thursday but came to a screeching halt yesterday. Some are alleging circular trading. Did you see Kenol go up 43% on Wednesday on 500 shares? Others are crediting the feelgood factor engendered by Obama. Whatever the play, I expect the positions to be unwound in the coming weeks.

Who between long-term investors and traders profits more over a market (bull, bear, bull) cycle?

Standard is venturing into Radio.
Scangroup completed the sale of a stake to WPP.